A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

September 10, 2012

Market-facing Innovation Labs

The corporate research lab has radically changed over the past several decades. Corporate labs reached their peak in the 1960s and 1970s. As technologies and markets changed, most such labs declined in importance over the next twenty years. But, they are being reincarnated in our 21st century information economy as market-facing innovation labs, with significantly different and broader scopes than those of the original industrial economy research labs.

Most of these labs were established by large, successful industrial companies in the years after World War II. Their job was to push the frontiers of knowledge by conducting both basic and applied research, which would hopefully, over time, lead to new commercial technologies and products.

I joined the computer science department at IBM’s Thomas J Watson Research Center when I finished my university studies in 1970, and worked there for fifteen years. In those days, R&D were two very distinct activities, the R conducted by scientists in research labs, and the D conducted by engineers in product development labs. Marketing, was another distinct activity in a product’s life cycle. These various handoffs resulted in large time gaps between research, product development, and marketing, but since both technology and markets advanced at a relatively slow pace, there was little pressure to reduce the transition times across the gaps.

A very good 2007 Economist article, The Rise and Fall of Corporate R&D - Out of the Dusty Labs observed that this strong separation between R&D&M was common across all industries. John Seely Brown, former director of Xerox PARC, succinctly captured the prevailing attitude of research labs in those days with this quote in The Economist article: “When I started out running PARC, I thought 99% of the work was creating the innovation, and then throwing it over the transom for dumb marketers to figure out how to market it.”

Needless to say, the dumb marketers and product engineers were usually unimpressed when we lectured them about our brilliant ideas. Since we did not have a good understanding of what it was that they actually did, let alone what their problems were, we could not tell them how our innovative ideas could be of help to them in their work. The gap between research, product development and the marketplace was pretty wide in those days.

Then around the mid-late 1980s it all started to change. The once impregnable walls between the various activities became increasingly porous and the time gaps started to narrow. The rate and pace of technology advances significantly accelerated. The old hand-offs and elapsed times to take a technology from the lab to the marketplace were no longer competitive, especially with products and services based on fast changing digital technologies.

Start-up companies did away with the gaps altogether, significantly decreasing the time-to-market for new products and services, and put huge pressure on those companies still operating under the old rules. These competitive pressures, were further exacerbated by the forces of commoditization and globalization, which made it unaffordable to continue supporting corporate research labs that had only a loose connection to products and customers.

“Now the big corporate laboratories are either gone or a shadow of what they were, . . .” said The Economist. “The traditional separation of research and development . . . is rapidly disappearing, especially in the information-technology industry. Does this mean the days when companies came up with big breakthroughs are over, too? Not necessarily.”

In fact, the capabilities we associate with research labs, - talented people coming up with innovative solutions to complex problems, - are more needed than ever. But, both the content and style of the work have radically changed.

Increasingly, the toughest problems requiring the kinds of breakthroughs you get from the very best technologist and scientists are out there in the real world, - in the marketplace. So, if these are the kinds of problems that inspire breakthroughs, we need our talented people to learn about them and hopefully come up with elegant, innovative solutions to those problems. And perhaps, they will also come up with new ideas that might lead to fundamental advances in science and technology.

Moreover, as digital technologies are penetrating every nook and cranny of the economy and society, we are developing new kinds of sociotechnical systems which combine powerful and ubiquitous digital technologies with the people and organizations they are transforming. Such systems are profoundly changing every single industry and the way all organizations operate, as well as our working and personal lives. But, they generally exhibit a level of complexity that is often beyond our ability to understand and control. Not only do they have to deal with the complexities associated with large-scale IT infrastructures, but with the even more complex issues involved in human and organizational behaviors.

The old style corporate research labs focused primarily on lab-based innovations in technology-based industrial sector companies. Now, the corporate research lab is getting re-invented as a kind of market-facing innovation lab. Much of their work involves the creation of new application solutions for their clients and partners in industry, government, finance, health care, education, entertainment and so on.

Market-facing innovation applies to every single business in every single industry. It applies to every sector of the economy, including the service sector, which accounts for almost 80 percent of GDP in the US, and over 2/3 of GDP in other advanced economies. By their very nature, market-facing systems involve services - that is, people and organizations performing tasks for each other, such as providing medical treatment, selling products, making payments and supporting customers. In most institutions, front-office activities involving people and services are the largest and fastest growing components, especially as we continue to standardize and automate back-office operations.

As a concrete example of a market-facing innovation lab, let me briefly mention Citi’s Innovation Lab in Dublin. The Dublin Innovation Lab, which I recently visited, was established only a few years ago. It is part of Citi Transaction Services (CTS), the unit of Citi responsible for providing financial services to companies, governments and other institutions in more than 140 countries around the world.

CTS’ business is built around highly complex, technology-intensive global systems, which must be able to keep up with the rapid changes taking place around digital technologies and global markets. The business-as-usual (BAU) waterfall development cycles are too slow to keep up with fast moving technologies and customer requirements. Consequently, CTS started innovation labs in Dublin, Singapore and Lodz, Poland, to help bring new products and services to market using the more agile development approaches typically associated with technology companies and startups.

The Dublin Innovation Lab has been building up its capabilities in Solutions Design and User Experience (UX), among the fastest moving areas in the world of systems given the advent of mobile devices including smartphones, tablets and sensors. Using an agile approach based on iterative, incremental development and close collaboration across functional units, the Dublin team was able to integrate mobile devices into one of CTS’ key institutional banking platforms and deploy the new mobile solution to clients around the world in less than six months. The team’s accomplishment was recognized with an innovation technology award by The Banker magazine.

Another major area of focus is identity management, an absolutely critical capability for supporting mobile money solutions in general, but especially in developing markets. As governments and companies reach out to the couple of billion around the world who are mobile phone users but lack banking relationships, it is important to come up with highly scalable, very low cost authentication solutions that are effective in reducing fraud while protecting the privacy and personal information of the users. This is a very good example of the kind of highly complex, sociotechnical, multidisciplinary solution that should be pursued in a market-facing innovation lab.

The ivory tower research lab served us well for many years as a source of new technologies and ideas. But, today that’s no longer enough. As the Economist observes: “The new model of R&D turns researchers into the shock-troops of innovation.” In today’s world, we have to come down from our ivory towers to do our research in the global marketplace – which has essentially become our 21st century innovation lab.